The Federal Reserve began its easing cycle with a 50 basis point cut on 18 September. The updated Summary of Economic Projections signals an additional 50 bp cut this year and a further 100 bp reduction next year. In response, the U.S. dollar, as measured by the DXY index, declined by 1.0% in September. However, the absence of sustained dollar selling likely reflects both the Fed's cautious forward guidance and ongoing tensions in the Middle East, which have increased demand for safe-haven assets like the dollar. Geopolitical risks often lead investors to seek stability in the U.S. dollar, mitigating some of the downward pressure from the Fed’s easing measures.The Federal Reserve began its easing cycle with a 50 basis point cut on 18 September, with projections indicating an additional 50 bp reduction this year and a further 100 bp cut in 2024. In response, the U.S. dollar, as measured by the DXY index, dropped by 1.0% in September. However, the lack of sustained dollar selling reflects both the Fed's cautious forward guidance and heightened tensions in the Middle East, which have driven demand for safe-haven assets like the dollar. Geopolitical risks often prompt investors to seek stability in the U.S. dollar, offsetting some of the downward pressure from the Fed’s policy moves. With the closely contested national election approaching, the market impact remains uncertain. Federal Reserve Chair Powell has emphasized that the central bank’s confidence in inflation returning to its target allows for greater focus on the slowing labor market. As rate cuts progress and the interest rate differential with other currencies narrows, the U.S. dollar is expected to enter a more pronounced downtrend.

The Bank of Canada (BoC) has been among the most aggressive G10 central banks in easing monetary policy, delivering three quarter-point rate cuts since June and likely to accelerate with a 50 basis point cut at either the 28 October or 11 December meeting. The decline in August’s CPI and rising unemployment, from 5.8% to 6.6% by August, pave the way for this larger cut. Meanwhile, Trudeau’s minority Liberal government is in turmoil after losing support from the New Democratic Party, forcing issue-by-issue negotiations. Recent special election losses and a close call in a no-confidence vote in September further underline his precarious position. The Quebecois party has given Trudeau until the end of October to improve pension benefits and protect certain agricultural sectors from international trade agreements, putting additional pressure on his leadership. While we anticipate the Fed to cut rates faster than the BoC, limiting the CAD's appreciation, a Trump victory could push USD/CAD higher and stir uncertainty around the USMCA trade deal. However, growth-focused policies in China should provide some support for commodity-based currencies like the CAD.

The euro's third consecutive month of appreciation has not been driven by positive developments within the Eurozone, where economic growth remains weak, with year-over-year expansion below 1%. Despite these challenges, the euro has strengthened, even as the manufacturing sector struggles with high energy costs. Current EUR/USD forecasts suggest limited near-term upside. Two key factors indicate that the European Central Bank (ECB) may adopt a more aggressive approach to rate cuts than previously expected. First, advance PMI data for France and Germany highlight continued weakness in German growth and a sharp drop in French services activity, with the services PMI falling from 55.0 to 48.3, its lowest level since March. Second, inflationary pressures are easing faster than anticipated, with the early October flash Eurozone CPI dropping from 2.2% to 1.8%, marking the first post-inflation shock reading below the ECB’s 2.0% target and the lowest since April 2021. While there is some scope for EUR/USD to move higher, the year-end level of 1.1200 remains, reflecting doubts about the sustainability of further gains from current levels.

Sterling has been the strongest G10 currency so far this year, rising approximately 5.1% against the US dollar. A cautious Bank of England, which currently holds the highest policy rate among G10 central banks, helped drive sterling's strong performance in September. At its peak, sterling gained around 1.7%, reaching $1.34, a level not seen since March 2022. However, recent comments from Bank of England Governor Andrew Bailey have shifted sterling's momentum, as he hinted that the central bank, after last month's pause, may move more aggressively with rate cuts. As a result, GBP/USD is expected to trend below 1.30 in the near term.

Japan has become the third G5 country to see a new government this year, following Labour's victory in the UK and the appointment of a new prime minister in France. However, the extent of policy changes under Prime Minister Ishiba remains unclear. After contracting in the first two quarters of the year, Japan's economy has gained some momentum, with modest growth expected for the remainder of the year, followed by stronger expansion in the first half of next year. Additionally, the Bank of Japan maintains a tightening bias, signaling its intention to continue raising interest rates, barring any new shocks. Although there are two more BOJ meetings this year (October 31 and December 19), markets have gradually pushed expectations for the next rate hike into next year. A downtrend has now emerged for USD/JPY, and assuming global inflation and interest rates continue to decline, further declines in USD/JPY seem inevitable as global yield spreads with Japan narrow.

After numerous promises of decisive action, Chinese officials made significant policy moves in late September to support the economy. These included rate cuts, support for the equity market, and adjustments to mortgage rules, which improved sentiment both domestically and internationally. The resulting boost in foreign investor demand for Chinese equities also contributed to a stronger yuan (CNY). However, the recent sharp appreciation of the CNY is unlikely to last, as the positive sentiment must be sustained by improvements in economic fundamentals. While the measures have sparked short-term optimism, China’s real economy will need time to regain momentum for a more sustained recovery.

In September, the Indian rupee strengthened slightly against the US dollar, moving from 83.868 to 83.798. However, the currency continued to underperform compared to other Asian currencies, even as the dollar weakened. The Reserve Bank of India maintained its repo rate at 6.50% during its August meeting. The USD/INR is expected to trade between 83.500 and 84.000, continuing to lag behind other Asian currencies as the US dollar weakens. This underperformance is partly due to a persistent current account deficit, expected to remain around 1.4% of GDP despite lower oil prices.

The Australian dollar appreciated by 2% in September, reaching its highest level since February 2023. This rise was partly due to Australia maintaining a restrictive monetary policy while other G10 countries and the Federal Reserve implemented rate cuts. Under the leadership of Governor Bullock, the Reserve Bank of Australia resisted market speculation of a rate cut, and the market has gradually abandoned expectations for such a move this year. However, future AUD gains are likely to moderate, as uncertainties surrounding China's economic growth persist, suggesting more tempered AUD/USD gains going forward.

The gains for NZD/USD exceeded expectations, driven by a revival in risk appetite that boosted demand for high-yield currencies like the New Zealand dollar. This was fueled by the larger-than-expected Fed rate cut and increased optimism surrounding China's recovery following a series of stimulus announcements. However, the upside for the NZD is likely to be limited by ongoing uncertainties and expectations of further easing from the Reserve Bank of New Zealand. Additionally, New Zealand's macroeconomic outlook remains weak, with real GDP contracting in Q2. Global volatility is expected to persist, undermining carry trades and putting further pressure on currencies like the NZD. There is also skepticism regarding the sustainability of China's stimulus measures in sustaining risk appetite.

The Mexican peso has fallen out of favor since June and the national election, showing only a slight recovery of less than 0.5% by late September, poised to end a three-month slump. Despite this, the US dollar held above MXN19.00 for the first time since December 2022. Investor confidence has been shaken by constitutional reforms, including the election of the judiciary. Meanwhile, inflationary pressures have continued to ease, and the economy is slowing, with year-over-year growth dropping below 2%. The central bank has implemented three quarter-point rate cuts over the past six months, with expectations of an accelerated pace ahead. However, near-term downside risks for the peso are likely to persist, particularly given potential retaliatory actions from the US, especially if Trump wins the presidential election. Trump has already pledged 200% tariffs on electric vehicle (EV) exports to the US and could push for changes to the USMCA, which is due for formal review on 1 July 2026. While Federal Reserve rate cuts could support a decline in USD/MXN, bouts of selling tied to international and US uncertainties are expected.